Update on Client Record Retention
By Joseph F. Scutellaro, CPA, NJSCPA Professional Conduct Committee –
May 6, 2011
CPAs' retention of client records has long been a hot topic for the New Jersey Society of CPAs Professional Conduct Committee and an area of confusion for CPAs. The question our committee hears most often is
“What records do we have to return to the client upon their request?”
The New Jersey State Board of Accountancy's Regulations §13:29-3.16 – Records
require licensees to furnish to their clients or former clients a copy of the following:
- The client’s tax return
- Any report or other document issued by the CPA for such client
- Any accounting or other records belonging to, or obtained from or on behalf of the client
- Copy of the licensee’s working papers, to the extent that such working papers include records which would ordinarily constitute part of the client’s books and records.
The Regulations are very short and concise and therefore give us no guidance on what documents can be considered client records and what represent CPA working papers.
We do get some guidance on this issue from the American Institute of CPAs Rules of Profession Conduct, ET §501 Acts Discreditable , Interpretation 501-1-Response to request by clients and former clients for records. This Interpretation has been updated twice over the past 10 years, first in 2000 and again in 2006. More recently, at its November 2010 meeting, the AICPA Professional Ethics Executive Committee approved adding the phrase, “including reproductions of such records” to the definition of “Client provided records” in Interpretation 501-1. The definition will read as follows:
Client provided records are accounting or other records belonging to the client that were provided to the member by or on behalf of the client, including reproductions of such records.
The revision will appear in the February 2011 Journal of Accountancy and will be effective on that date.
For example, if your client provides you with what appears to be a copy of his or her Form 1099, you should consider that copy to be part of your client’s records and subject to being returned.
The Interpretation gives three categories of documents which constitutes client’s records:
- Client provided records held by the member.
- Client records prepared by the member, including tax returns, general ledgers, subsidiary journals, and supporting schedules such as employee payroll records and depreciation records, and
- Supporting records, which are defined as “information not reflected in the client’s books and records that are otherwise not available to the client with the result that the client’s financial information is incomplete”. Examples of this type of client record are: adjusting, closing, combining or consolidating journal entries (including computations supporting such entries).
The question you must ask yourself in determining what other workpapers may be considered clients records is: Can someone else complete the work without that schedule? If the answer is no, then you it would most likely constitute client books and records and must be returned to the client upon request.
Under the AICPA Interpretation examples of member’s workpapers that do not constitute client records and therefore do not have to be returned to the client are: audit programs, analytical review schedules, statistical sampling results, analyses and schedules.
A question that was addressed by the AICPA when it revised §501-1 back in 2000 was: what medium should be used to provide the information to the client? For example, if you maintain your client’s general ledger using bookkeeping software such as QuickBooks, and a client or former client requests that you provide them with the QuickBooks file instead of a printout of the general ledger, do you have to give them the electronic version? In a footnote to §501-1, the AICPA indicates that you should give them the electronic version of the general ledger if you have it in that format. However, the footnote also makes it clear that a member is not required to convert information that is not in electronic format to an electronic format.
§501-1 requires members to follow the laws and regulations of states that impose greater obligations on the CPA than the AICPA’s interpretation. Since the New Jersey State Board of Accountancy’s Regulations do not address this issue, one should follow the more restrictive rules. However, the AICPA does use the word “should” and not “must” and did move this issue out of the body of the rule and into a footnote with the 2006 revisions.
Another question that comes to our Committee is
“Can a CPA require that fees due on an engagement be paid before client records or copies of finished products are provided to the client?”
AICPA Interpretation §501-1 allows members to charge the client a reasonable fee for the time and expense incurred to retrieve and copy such records and require that such fee be paid prior to the time such records are provided to the client.
Treasury Department Circular 230 also addresses this issue for tax related documents in §10.28- Return of client’s records, which states, “The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section. Nevertheless, if applicable state law allows or permits the retention of client’s records by a practitioner in the case of a dispute over fees for services rendered, the practitioner need only return those records that must be attached to the tax return …”. Since Circular 230 refers to state laws not AICPA rules, we need to look at the New Jersey Board of Accountancy Regulations, not Interpretation §501-1. The Board of Accountancy Regulations do not include any language allowing New Jersey CPAs to hold client records until fees are paid, and furthermore, based on previous decisions by the New Jersey State Board of Accountancy, it is clear that New Jersey CPAs must comply with a client’s request for return of all client records regardless of any unpaid bills.
Providing Client Records to Others
Although not a records retention issue, there are two IRS Code sections that address assessment of penalties on tax preparers when providing copies of client tax information to persons other than the client.
IRC§ 6103(c) is a civil penalty provision that states “the disclosure of tax returns to partners, S corporation shareholders and estate and trust beneficiaries shall not include any supporting schedules, attachments or lists which include taxpayer identification information of a person other than the entity or the person receiving the tax return”. Accordingly, tax preparers and tax matter partners/shareholders responsible for maintaining the client copy of tax returns need to either remove or redact K-1s and any other attachments to tax returns that include such identity information, especially social security numbers. This includes not only disclosure to third parties such as bankers, but also other partners, shareholders or beneficiaries.
Much more troubling to tax preparers when it comes to IRS penalties relating to disclosure of client tax information is IRC §7216 and the recent update to the Regulations. The revised Regulations, effective January 1, 2009, provide specific language that must be used when obtaining a client’s permission to disclose their tax information to third parties. In particular, such authorization must be in writing and signed in ink to avoid assessment of penalties under this Code section. The AICPA has guidance and sample disclosure forms available on their website aicpa.org. However, since §7216 is a criminal penalty provision, which includes up to one year in prison for a willful violation, CPAs should refrain from sending client tax information to third parties and instead send the requested documents to the client for them to forward to the third party.
If you still have questions about these issues, please forward your questions to NJCPA Government Relations Director Jeff Kaszerman at email@example.com and the Professional Conduct Committee will be happy to assist you in understanding the applicable rules.